JetBlue Airways reached a deal to buy Spirit Airlines on Thursday, a merger that could reshape the airline industry by putting pressure on the nation’s four dominant carriers.
The deal, which values Spirit at $3.8 billion, would create the nation’s fifth-largest airline, with a share of more than 10 percent of the market, behind United Airlines, which has a nearly 14 percent share. Delta Air Lines and Southwest Airlines control more than 17 percent each, while American Airlines has more than 18 percent.
The merger is likely to face a thorough investigation from the Biden administration’s antitrust regulators, who have taken an aggressive stand against corporate consolidation, especially in industries already dominated by a few businesses. Given that reality, JetBlue’s top executive sought to cast the Spirit deal as a way to make his industry more competitive, rather than less.
“Our argument is clear: The best thing we can do in the U.S. to create a more competitive industry is to allow JetBlue to grow,” Robin Hayes, the company’s chief executive, said in an interview.
The agreement is a victory for JetBlue, which spoiled a rival offer: Frontier Airlines and Spirit called off a merger deal on Wednesday after Spirit struggled to persuade its shareholders to back the offer, which fell short of JetBlue’s by about $1 billion.
JetBlue and Spirit said they expected to seek approval for the deal from Spirit’s shareholders this fall and from regulators by early 2024. The airlines plan to close the transaction no later than the first half of 2024 and begin operating as a single carrier by the first half of 2025.
But the merger could be hard to complete. Regulators have already sued JetBlue and American over a partnership at airports in Boston and New York. And on Wednesday, the Federal Trade Commission filed a lawsuit to block the social media giant Meta’s acquisition of a small virtual reality company, Within.
To address regulatory scrutiny, JetBlue has said it will pre-emptively divest from certain airports where it and Spirit together have a big presence. A major concern in airline mergers is that they can make one company dominant at certain airports or on particular routes, enabling it to squelch competition and raise fares for some travelers. If regulators prevent the acquisition, JetBlue will pay Spirit $70 million and Spirit’s shareholders $400 million.
“The airline industry is ridiculously concentrated, and has been and legitimately continues to be an area of focus for the Justice Department,” said Bill Baer, a visiting fellow at the Brookings Institution who led the department’s antitrust division in the Obama administration.
While companies involved in mergers with direct competitors generally argue that the combinations will increase competition and benefit consumers, Mr. Baer said, they don’t typically work out that way. The terms of the JetBlue-Spirit deal suggest that the airlines are preparing for an uphill battle, he said.
Under the agreement, JetBlue would acquire Spirit for at least $33.50 per share in cash, significantly more than Spirit’s current price. Spirit’s stock ended Thursday up less than 6 percent, at $25.66 per share, reflecting skepticism about the deal. Frontier’s stock, meanwhile, shot up more than 20 percent on Thursday.
JetBlue said it would pay Spirit shareholders $2.50 per share upfront on their approval of the deal and the equivalent of 10 cents per share per month next year — an incentive to keep them on board during what could be a long process. If the deal is not completed by 2024, its value could rise to as much as $34.15 a share.
The combined airline would be based in New York and led by Mr. Hayes. It would have 458 aircraft, 34,000 employees and an estimated 77 million customers, the airlines said.
JetBlue said it expected $600 million to $700 million in annual savings from spreading fixed costs over a larger business. Based on 2019 figures, the annual revenue of the combined airline is projected to be about $11.9 billion.
After years of bankruptcies and consolidation, the airline industry had mostly stabilized by the early 2010s, with the four large carriers controlling most of the market. In 2016, JetBlue lost a bidding war for Virgin America to Alaska Airlines.
The Spirit acquisition would help JetBlue to expand its presence in cities like Fort Lauderdale and Orlando in Florida, San Juan in Puerto Rico, and Los Angeles. The airline also said it expected to grow at the hub airports of the larger carriers, such as Las Vegas, Dallas, Houston, Chicago, Detroit, Atlanta and Miami — a strategy devised in part to win over antitrust regulators who are eager to see more competition at airports where one or two airlines control most gates and flights.
But even if the deal closes successfully, airline mergers are notoriously difficult, requiring the melding of unions, sometimes antiquated and incompatible computer systems, mismatched fleets of aircraft and disparate company cultures.
“The merger will be a case study of the winner’s curse,” Erik Gordon, a business professor at the University of Michigan, said. “JetBlue will face years of nightmares trying to integrate aircraft, systems and cultures that are from different planets.”
When American and US Airways merged about a decade ago, it took four and a half years to negotiate a single contract for mechanics, ramp workers and other employees represented by the Transport Workers Union of America, said Gary Peterson, the director of the union’s air division.
“Combining work groups is like combining the Mets and the Yankees into an organization,” he said.
Mr. Peterson said that passengers and workers were generally losers in such combinations but that the union would fight to protect workers as the merger proceeded.
Sara Nelson, the president of the Association of Flight Attendants-C.W.A., which represents flight attendants at 19 airlines, including Spirit, said her union would support the deal only if flight attendants shared in its benefits.
“Our job is to improve conditions for workers and to be strategic about how we do that,” she said in a statement.
The JetBlue-Spirit deal arrives amid widespread dissatisfaction with the airline industry, which has struggled to keep up with recovering travel demand over the past year.
The Transportation Department said recently that it had received more than twice as many complaints about airline refunds, delays, cancellations and other problems in May than it did in the same month in 2019, even though fewer people were traveling. In April, the department received more than three times as many complaints as it did before the pandemic.
While JetBlue ranks high in customer satisfaction, Spirit has fewer fans. And both airlines have struggled to run smoothly during the recent recovery. About 68 percent of Spirit’s flights and just over 62 percent of JetBlue’s arrived on time this year through May, according to the Transportation Department. Spirit ranked seventh and JetBlue 10th among U.S. carriers in on-time performance over that period. Spirit has improved significantly in that regard in recent months but JetBlue only slightly, according to FlightAware, an aviation data provider.
Some experts have questioned the assertion by the airlines that the deal would benefit consumers, arguing that JetBlue would be unable to keep costs as low as Spirit, which is known in the industry as an ultra-low-cost carrier.
“We have yet to see an airline merger in the United States in the last 30 years that has been good for consumers, good for labor and good even for the cities and regions in which they operate,” said William J. McGee, a senior fellow for aviation and travel at the American Economic Liberties Project, which pushes for stronger antitrust policies and enforcement.
Spirit and JetBlue’s deal could inspire other airlines to merge to stay competitive, said Helane Becker, a managing director and senior analyst at Cowen, an investment bank. “If this transaction were to get done, it may encourage smaller airlines, especially regional airlines, to consider merging,” she said.
JetBlue and Spirit said they would continue to operate independently, with loyalty programs and customer accounts unchanged, until the merger was complete.